One of the traditional and most relevant KPIs measured in supply areas is the savings indicator. However, for some organizations it is not clear how to efficiently and clearly measure the contribution to EBITDA that occurs in the supply chain, as a result of the management of the areas involved.

KPI’s focused on the supply chain

Each company and expense category may have specific characteristics that vary the measurement, however, it is key to take into account the following criteria inherent to the step by step of the supply chain to ensure that the measurement or estimation of savings has real meaning and is reflecting its essential objective:  to provide greater utility to our companies with timely and quality supplies.

1.Define the budget

In the budget to pay process , everything starts with a defined budget. This financial planning exercise lays the foundations for the projection of OPEX and CAPEX spending. In this exercise, the co-creation of the framework between the budget, supply and end-user areas is essential.

We must avoid making the mistake of simplifying the exercises, indicating that the budget is the previous year’s execution plus an indexation factor. Or for example, indicate an arbitrary % reduction expected by a specific goal. It is clear that the aforementioned inputs are valid, but  they must be contextualized and agreed upon with the different actors  so that the exercise has a financial sense aligned with operational reality.

2.Establish processes

When having a global budget value, it is essential to translate it into purchasing and contracting processes.  It is essential to understand that the money allocated as a financial budget is not a supply plan . The need then arises, and ideally simultaneously, for the user areas, under the rules defined by finance and supply, to translate these budget items into specific purchasing and contracting processes. Which results in a  Strategic Supply Plan  with key inputs defined in times, conditions and money.

The purchasing plan is the essential step to begin projecting a specific budget for a supply process, with an eye toward aggregating demand and searching for synergies.

3.Generate synergies

When it is required to materialize the purchase or contract, the value of the supply plan must be translated into a specific request with a specific value. Here market realities must be taken into account, at a macro and microeconomic level, to ratify the price, analyze the quantity and real technical conditions of the purchase, validating if any costs can be optimized or avoided.

At this moment  the real budget that will be available for the supply is defined . Leveraged market studies with the purchasing team and historical prices are the basis for reconfirming the budget value.

4.Start negotiations

With a defined value, the negotiation or materialization process proceeds, via an RFX as the case may be. Here the door must be left open to alternative offers, involving suppliers in the pre-enlistment and quoting stages so that, as experts in their categories, they suggest efficient cost structures based on their experience. This allows structuring terms of reference focused on the best form of execution within the framework of a win-win relationship.

The result of a negotiation, after technical and legal analyses, is a comparison under the Total Cost of Ownership model, with which purchasing teams analyze the total cost of a supply based on criteria and a time horizon. With a final purchase value, the savings in the negotiation are established.

Savings in negotiation are projected, since they only materialize in execution. Once a contract is executed,  the baton is given to the administrator or end user, who has a responsibility to be efficient in its execution . Seeking to optimize as much as possible so that the negotiated prices and projected savings are not diluted, as a result of new costs or additional quantities, in the contractual reality.

Finally, everything leads to an invoice, which has defined payment terms. This is where the accounts payable and treasury areas come in; which depending on the cash situation can opt for measures in favor of cash flow. Discounts for proto payment, extension of payments without affecting the conditions and cash flow of the contractor, are alternatives that allow optimizing working capital and generating real benefits to EBITDA.

In conclusion,  savings are like a waterfall, they are estimated in a budget and materialized in an invoice.  To measure them, it is key to understand that it is not a process of a single area, the savings are company-wide and must be agreed upon among the stakeholders: budgets, supply, end users and treasury; understanding that the supply chain is a relay race. The challenge is to align these actors (who often work as islands) and create a corporate framework for measuring real efficiencies.